A credit rating evaluates the creditworthiness of a borrower. Corporations and governments issue bonds to borrow money.

What does it mean in respect of bonds?

When you buy a bond, you are lending your money to someone — the government or a private company, which promises to repay you within a specified tenure. Credit ratings represent the ability of the bond issuer to repay. A higher rating implies that the bond issuer has a lower likelihood of defaulting on payments.

How are they calculated?

There are no specific mathematical formulae. Agencies use public information available, historical trends, discussions with government officials and future outlook to determine credit ratings.

Dun & Bradstreet, Moody’s, Standard and Poor’s (S&P) and Fitch Ratings are among the ones which operate worldwide. In India, commercial credit rating agencies include CRISIL, CARE and ICRA among others. Whom does the credit rating benefit? It is used by individuals and entities that buy bonds issued by firms and governments to determine whether the borrower will repay as promised.

What has S&P said about India’s sovereign rating?

S&P has maintained India’s sovereign rating at BBB- and the rating agency has warned that India faces at least a one-in-three chance of its ratings downgraded in the next two years. The BBB- rating is one notch above “junk,” which carries a higher risk of default.

What is a junk bond?

Bonds that have higher credit rating are also known as investment-grade bonds. Bonds that have very low credit rating are known as junk bonds because of a stronger likelihood of default.

Why has S&P lowered its outlook on the Indian economy?

The agency is of the view that widening current account deficit or the gap between imports and exports is set to reach alarming levels. This will reduce the government’s elbow room to borrow and spend its way out of a crisis. Besides, “political gridlock” is delaying attempts to reduce a mounting subsidy bill on fuel and fertilisers. Introduction of Goods and Services Tax or GST is important to push growth and there has been a standstill on easing of foreign investment norms in insurance, banking and retail.

Should I be worried?

If you have a regular day job —teacher, manager, doctor, software engineer, real estate consultant and so on — you have little to worry about now. But a weakening economy could prompt companies to defer capacity expansion activities, cut down on hiring plans and reduces job prospects.

Has any other agency also aired similar views about India?

Yes. Moody’s has also raised fresh questions over India’s economic health. Moody’s Analytics termed the government as the “single biggest drag” on India’s business activity. “The single biggest factor weighing on the outlook is the Indian government. In all economies it is impossible to separate the economic from the political outlook, and that is particularly the case in India,” Moody’s Analytics senior economist Glenn Levine said in a commentary last week.

Has similar comments been made about other economies, especially the US?

Yes. Last year, S&P downgraded the US government’s credit rating from AAA to AA+. The delay by US lawmakers to reach a consensus on containing the country’s spiralling debt led S&P to dock the credit ratings. Most recently, last week, S&P cut Spain’s credit rating by two notches to BBB+ and warned about worsening fiscal situation in the European economy.